U.S. Mortgage-Backed Securities Outlook – Jan 2020
Posted: Monday, February 3, 2020

Heading into 2020, we believe securitized products appear attractive relative to U.S. Treasuries (UST) and corporate credit. After a year of strong performance from investment grade corporate credit, which returned 13.80%, as measured by the Bloomberg Barclays U.S. Credit Index, we believe valuations within investment grade corporate bonds are extremely rich while spreads are historically tight (Figure 1). Additionally, the duration of the Bloomberg Barclays U.S. Credit Index was 7.65 years as of December 31, 2019. Should rates rise in 2020, investors may be exposed to principal losses due to the long duration of investment grade corporate bonds. Relative to corporate credit, structured credit can offer investors lower interest rate duration as well as a yield pickup over similarly rated corporate bonds. In a rising rate environment, securitized credit has historically outperformed corporate credit as amortizing principal can be reinvested at higher yields. Within Agency MBS, valuations are favorable given current option adjusted spreads (OAS) are near the widest levels of the past five years.

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